Keyword: Price-to-Earnings Ratio (P/E)

Is the ratio of a company’s per-share price to its per-share net earnings. There are two common variations of the p/e ratio–the trailing p/e and the forward p/e. The trailing p/e is the current per-share price divided by the latest 12-month earnings per share. The forward p/e is the current per-share price divided by the estimated net earnings for the next 12 months. Estimates are published by qualified securities analysts who are known to follow the stock. In general, the higher the p/e ratio, the less a stock’s potential for growth. A company with a low p/e ratio may be undervalued, or the market may sense it’s a company in decline, or its recent earnings may have been bolstered by an unusual or extraordinary event. A company with a high p/e ratio may be overvalued, or the market may sense it’s a company that’s a growth stock with earnings expected to rise substantially in the future, or it’s the subject of some market speculation such as a possible take-over offer. The p/e ratio is most useful when comparing a company to its own historical ratio, to others in its own industry and its sector, and to the market in general. A weakness of the p/e ratio is that the earnings (i.e. the denominator) are subject to accounting rules and guidelines that can be frequently manipulated and may reflect varying international standards.